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quattro system?

My engineer friend (who likes to start arguments)  insists that all 4wheel
and All-wheel drive systems must suffer poor gas mileage.   I insisted that
audi is competitive with most cars in gas mileage.  With the numbers to shut
him up, he quickly changed his arguement to: These cars are severely under
powered then.   Now being a finance Major, I don't know much about how the
quattro works (I do, however know about how to finance them ;) ).   Could
someone lend me some insight as to how the quattro system works?   Thanks in
                            Reid Meyer
'81 5ks (recently deceased)
'94 Jetta GL